Sirius XM Radio And Liberty Media: The Waiting Game Is Almost Over

| About: Sirius XM (SIRI)

In early 2009 Liberty Media (LMCA) bailed out SiriusXM Radio (NASDAQ:SIRI) with two loans totaling more than half a billion dollars. Taking advantage of frozen credit markets, Liberty was also able to purchase preferred stock for $12,500 that was convertible into common shares representing 40% of Sirius. The complex agreements granted Liberty more rights than would typically accrue to a minority investor, and also carried Standstill Restrictions on how and when Liberty could increase its ownership. The last of the Standstill restrictions expired on March 6, 2012.

Liberty Media certainly kept busy in anticipation of that date. In March the company filed a petition with the FCC seeking de facto control of the Sirius licenses. The petition was rejected last week, and based on information released by Liberty in its first quarter results press release and its recent SEC filings, the rejection was not unexpected. The FCC on May 4th wrote:

as the facts disclosed in the referenced applications are not sufficient to establish that Liberty Media intends to take actions, such as conversion of preferred to common stock and installation of a board majority, that would constitute exercise of de facto or de jure control.8 We therefore dismiss Liberty Media's applications.

Liberty has now clearly demonstrated its intentions to take de jure - or majority control - of Sirius. In its press release Liberty noted that it has:

Entered into a forward purchase contract for 302 million shares of SiriusXM, with a forward price of $2.15 per share for a total notional amount of $650 million. If physically settled, will increase Liberty's ownership to 45.2% on an as-converted basis

When the news was first disclosed, there were some that questioned whether the phrase "If physically settled" was an indication that Liberty wasn't really committed to spending the money necessary to acquire the 302 million shares. The recent SEC filings by Liberty should clear up much of the ambiguity, although there still may be some that cling to their doubts. The Schedule 13D filed on May 9th discussed the Forward Purchase Agreement.

  • On December 30, 2011, the Reporting Person - Liberty - entered into a forward purchase contract (which, in my opinion, indicates that Liberty had been planning to go for de jure control prior to their FCC petition for de facto control)
  • The expiration of the Forward Contract is to occur on the 60th day following the determination of the final number of shares to be covered by the Forward Contract.
  • The unaffiliated counterparty completed its initial hedge, and the number of notional shares covered by the Forward Contract has been fixed at 302,198,700 shares. We now know the forward contract expires on July 6th - early in the third quarter, as was also disclosed on the company's conference call.
  • The settlement date is scheduled for July 11, 2012. The base price under the Forward Contract is approximately $2.15 per share.
  • And, last but certainly not least, Liberty has made $230 million of prepayments to its counterparty.

It is true that Liberty can opt for a cash settlement under the agreement as opposed to taking physical delivery of the shares, but that seems unlikely, especially when one considers that Liberty has also, according to the same 13D, as well as the Form 4 filed on May 9th, acquired 60.35 million shares through direct purchases on May 8th (16 million shares at a weighted average price of $2.137 per share) and May 9th (44.35 million shares at a weighted average price of $2.126 per share). Liberty's potential ownership percentage would be approximately 46.2% after the transactions. The percentage also includes the shares underlying the $11 million worth of 7% Exchangeable Notes also held by Liberty.

What's Next?

For more than a year Mel Karmazin has been discussing the buildup of cash at Sirius and returning capital to shareholders in one form or another. It now looks like he won't have to be concerned about that decision as it will soon be Liberty's "problem." Sirius investors should be wondering, "What's next?"

What will Liberty do with Sirius? Liberty Media CEO Greg Maffei has left a variety of options open for months and has given no indication which direction the company will take. One of the possibilities he discussed in late February was:

you buy up to 51%, you get yourself into a position of hard control, you then can direct how their cash can be deployed and how you then have a systematic shrink there which increases your ownership percent at the Liberty level.

With Liberty well on its way to 51%, is this the end game for Liberty?


When discussing the Liberty FCC petition on the Sirius conference call on May 1st, CEO Mel Karmazin said:

The Board of Directors of our company has control of the company. There are 13 members of our Board, and Liberty has 5 participants of that 13. Liberty's 40% is significant influence but not control. As we said in our filings, 40 is not the new 50.

Although the FCC dismissed the Liberty petition, Liberty is now clearly in position to go to a majority ownership position in Sirius by early in the third quarter. They will refile for control of the FCC licenses and will be able to show that they intend to take de jure control.

With Liberty's intention to take a majority position in Sirius now fairly obvious, it is time for the two companies to sit down and openly discuss Liberty's plans and the future of Sirius. For the most part, it looks to be a one sided discussion with Sirius doing the listening and Liberty will doing the talking.

Disclosure: I am long SIRI.

Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time. I hold no positions nor do I currently plan to open a position in Liberty Media.

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